Lack Of Governance Prime Target Of Regulators

The number one board governance issue that gets nonprofits in trouble is directors and senior leadership failing to be sufficiently active and informed.

That was the takeaway from a panel discussion during the recent public day of the annual conference of the National Association of Attorneys General (NAAG) and National Association of State Charity Officials (NASCO) at The Westin City Center in Washington, D.C.

Vernetta Walker, vice president for programs and chief governance officer at BoardSource; James Joseph, a partner with Arnold & Porter, LLP, and Tennessee Deputy Attorney General Janet Kleinfelter, who heads the Public Interest Division, participated in a panel titled, “Board education: Top 10 ways to get investigated and how board education can help prevent it.”

Too often in the recruitment process, board members recruit friends for a vacancy, selling them on the idea that it doesn’t require a lot to be a board member. “That’s the bar they’re setting,” Walker said. Board members also might fall back on the fact that they’re “just a volunteer,” assume someone else on the board will take care of it, or just don’t have time to ask staff about financials.

Among other ways that boards can get themselves investigated:

  • Safeguarding assets. Fraud and embezzlement also are failures to adequately protection donor information. Money and a lack of oversight, put together, creates a bad situation, said Joseph. “The key to safeguarding assets is duty of care, one of the fundamental institutional duties,” he said.
  • Conflicts of interest. Would the media and your mother understand? Kleinfelter recalled a situation where an architect who was a member of a nonprofit board helped to write a grant proposal and whose firm ended up getting a contract via that proposal.
    Excessive compensation and or an executive director with too much power. “How many times do we see a board rubber-stamp what an executive director does? It’s just a lot easier to say, ‘you know what’s best, we’re just volunteers, we have a day job,”’ Kleinfelter said. You have to justify what you’re paying your people and the board should have some oversight in setting compensation, Joseph said.
    Clear failure to follow the mission of the nonprofit. What was the purpose of the nonprofit? The board cannot be asleep at the wheel. Joseph said this is duty of obedience. Mission drift is usually very subtle, Walker said, and usually occurs because a board is following the money. Ask boards, what are you willing and not willing to do for money, Walker said. “Sometimes boards go after the money,” Joseph said.
  • Membership issues/managing board conflict. “If you don’t resolve conflicts — we will,” Kleinfelter said. If you don’t have a culture where people can self-report, they’re going to report it to our office, or worse, to the press,” she said.
    Public accountability and transparency. Failure to comply with federal and state reporting requirements or failure to keep adequate and timely records. Because it’s cheaper, smaller nonprofits might not have anything but electronic bank statements. If no one is saving .pdfs of bank statements, organizations have to go to the bank to get statements if an attorney general’s office requests them.